By Colin Anderson, Friends & Family Capital

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"Is my cash safe?"

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I have helped numerous founders/CEOs/CFOs think through this question for their companies over the last decade...and with many more in just the last few days.

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My goal with this piece is to help entrepreneurs and operators sleep better at night by knowing that they will always have access to the cash they need to run their businesses. Architecting Treasury Operations in an early stage and growth stage company is critical for business strength, and it has now come front and center in the post-SVB collapse world.

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For context, I built and led finance at Palantir Technologies between 2009 and 2017, the last six years of which I was the CFO.

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The macro backdrop while building Palantir was in the wake of the Global Financial Crisis (GFC), where financial market volatility stemmed from a constellation of factors including fear of insolvency in large and small banks, the housing crisis, risky bets inside large institutions, and the seizing-up of short-term liquidity markets, among other factors.

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The finance team's high-level purpose while at Palantir was multipronged, including to support the smooth operations of the business while raising and protecting our war chest of cash. We scaled our balance sheet by 10x during my tenure up to around $1 Billion in cash. The team at Palantir that accomplished these feats was top notch (granted I am biased), and it was truly a team effort.

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My simple lens at the time was to organize our finance team's workflows across three buckets: (1) bring cash in, (2) send cash out, and (3) protect the cash we had. The Treasury Operations function touches all three of these and should be a key area of focus for CFOs and finance leads.

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The events of the last week have underscored that history may not repeat, but it does rhyme, and the key question is raised again: "Is my cash safe?"

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10 Principles to Cash Management

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To motivate this question, below are some of the principles to cash management we employed while I was CFO in the wake of the GFC to enable Palantir to operate from a position of balance sheet strength:

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1. Your Cost of Capital is Related to Your Need of Capital

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• Intent: Never put yourself in the position where you need capital because it will cost a whole lot more...or not even be there.
• Example: When you operate from a position of balance sheet strength, you can afford to invest in growth and product for the foreseeable future. Another benefit is that you can negotiate generally more reasonable financing terms for a given market environment. For example, a great business with years of cash on its balance sheet will get a better price (whether fundraising or borrowing) than that same business with weeks or months of cash on its balance sheet. Therefore, it is critical as you build your Treasury Operations to ensure that across a range of bad scenarios (examples given below), your accessible cash balance keeps you in a position of strength should you need to raise equity or debt to replenish your war chest.

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2. Diversify Your Counterparty Risk

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• Intent: Only let a given bank or institution hold an amount of cash that you can afford to not touch for a year (or lose entirely) and still operate from a position of strength. If you are a small team and this is not feasible, at a minimum try to set up multiple banking partners with no more than 1/3 or 1/4 of your cash at each.
• Example: At Palantir, we had many counterparty banks/custodians around the time we had $1 Billion of cash on the balance sheet. The directional target was exposure as low as $25 Million and as high as $100 Million (for the safest locations) per bank. The goal was that if one counterparty went away overnight (bank collapse, cyber-attack, etc.), we would only lose between 2% and 10% of our total balance sheet. Yes, $100 Million would be material if lost (and fortunately we never ended up in this scenario!). However, we could still run the business from a position of strength with the remaining $900 Million. Much better outcome than if we lost (even if for a period of time) $1 Billion.

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3. Diversify Your Operational Risk

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• Intent: Ensure you can consistently run the basics of your business through periods of financial sector volatility, including cash collections from customers, salary payments to employees, rent payments, and critical vendor payments, among other key items.
• Example: It's much easier to pay vendors from a different bank or to send customers new bank wire instructions for collections than it is to KYC and open an account during a fire drill (for you and the banking system). At Palantir, we sought to have more than one operational banking partner at any given time. For simplicity, we tried to run operations through the same operational bank accounts for most workflows. That said, knowing we had a spare banking partner ready to go helped me sleep better at night.

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4. Stay Safe and Liquid...Don't Chase Yield

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• Intent: You will create more value by growing your business than by investing in riskier instruments or tying up funds for longer durations.
• Example: As CFO of a fast-growing private technology company, a seemingly endless stream of investment professionals will pitch ways to earn more on your cash. It's easy to be seduced by the promise of more yield, especially when you hear arguments like turning treasury operations from a cost center to a profit center. My standard set of opening questions here goes something like: "How fast are our sales expected to grow? Can the incremental yield beat that?" My guess is a resounding "no". With cash to invest in the business, the business can grow quickly. If the business cannot access its cash, it can't grow at all. So don't put that cash at risk. From a valuation standpoint, put another 8x to 12x forward sales multiple on that incremental topline number (depending on market regime and growth rate). You can only achieve this potential valuation expansion when you invest in your business from a position of strength. These are likely big numbers at this point. To make the example more concrete, let's pretend you have $100 Million on the balance sheet that you don't need for 3 months. Assume the current risk-free yield is 4% for 3-month US government paper. You can invest for a longer duration and in slightly risker instruments and pick up an extra 2%. Your business is expected to go from $100 Million in sales to $200 Million in sales over the next 12 months. Where is the most valuable place for your cash? Safe cash strategy: 100% business growth and an increase in valuation of $1 Billion (e.g. $100 Million of incremental sales * 10x forward multiple). Compare that to the extra 2% cash growth by going non-risk-free, and the extra $2 Million in cash yield. This also ignores the potential down round you would have to take if your cash became stuck for some reason (slow FDIC recovery process, failed auction rate security market, bankrupt municipals, etc.). 100% growth is much greater than 2% yield. $1 Billion valuation gain is much greater than $2 Million incremental interest.

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5. Know Your True Counterparties and Risks

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• Intent: What risk do you actually hold with your counterparties? What instruments do you actually hold and with what underlying risk profiles and protections? Does the institution that issued the instrument have an "out" (i.e. explicit taxing authority in its own reserve currency and a printing press, or something of similar intent)?
• Example: There will always be some risk. The goal is to mitigate and manage it. Part of this is creating legibility to understand the surface area of the actual risk you absorb. For example, is your cash above the FDIC limit of $250,000 sitting in an account at your bank (i.e. you face your bank)? Is it custodied at a different bank on your behalf or in securities held in "street name"? Is it in a money market or other structured fund (i.e. not at your bank in cases)? If you hold government paper, is that the US federal government (reserve currency with explicitly taxing authority and a printing press) or non-federal government (states and municipalities can't print their own currency, although they can tax)? Where do you have credit lines, and who administers those facilities (it can be different)? It will be up to you, your board, and your team where you want to absorb risk. The point here is just to accurately understand what those risks include.

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6. Segregate Bank Accounts and Team Roles

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• Intent: Criminal Willie Sutton famously quipped that he robbed banks "because that's where the money is". By the same token, assume your team, your vendors and your partners will be targeted to get to your money.
• Example: Entrepreneurial bad actors will try many methods to "trick" your money out of your war chest. As just a few examples: phishing attacks requesting urgent wires sent to your team, hacking vendors with direct debit privileges into your bank accounts, stealing credentials from your team, along with numerous other vectors. A general best practice is to follow segregation principles to help mitigate these risks. For segregation of accounts, we established a multi-tiered system of bank accounts within our operational banks to ensured that operational accounts (e.g. those that had direct debit privileges or had wire instructions distributed broadly via AP, AR or fundraising functions) never contained large cash balances. For segregation of duties, it always took multiple different team members to prepare and approve wires. Further, only certain people could move funds from bank accounts with larger balances of cash or treasury bills to our other operational accounts at those same banks. Then only different people could move funds from said operational accounts to external parties. All of this was done using multi-factor authentication along the way. Where possible, the physical key fobs for the folks with access to the largest bank accounts and institutions were often locked up by still different team members. Maybe some of this is overkill...nevertheless, your company mission rests on making sure you keep your war chest safe from bad actors and financial volatility.

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7. Design a Trustable System

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• Intent: As a business scales, its Treasury Operations will need to rely more and more on trusted systems and privileges, not just the trusted individuals running it. Trust, yet verify at all levels.
• Example: When start-ups are small, Treasury Operations is often comprised of single bank portals managed by founders and maybe an accountant or bookkeeper. While these are trusted individuals by default, segregation principles are still important even at these early stages. As operational complexity and cash balances grow, Treasury Operations must evolve too. From an external perspective, it is important that parties outside the system have legibility and trust in the design and controls of the Treasury Operations system. External parties need confidence cash is safe and will be there when needed. Further, they will likely not have the proximity to individuals on the Treasury Operations team to query them or their controls directly. From an internal perspective, Treasury Operations team members need to know that they are trusted members of the team, yet also must operate within a trusted controls and policy environment.

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8. Build Operational Legibility and Levers into Your Treasury Operations

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• Intent: A real-time common operating picture of cash and cash equivalent balances is necessary to get liquidity where it needs to be at the right time, especially in advance of or in response to financial sector volatility.
• Example: Best practices earlier in a company lifecycle often include daily or weekly reconciliation of account balances by team members owning Treasury Operations, and a broader review of static dashboards on a weekly or monthly basis. Over time, real time dashboards and consolidated views become more important, especially as complexity grows (banks, accounts, roles, countries, currencies, instruments, durations, etc). The team must know where liquidity sits currently, and where it needs to be within the next week, month and quarter. Further, you should have a playbook in case you need to change the status quo quickly. Bloomberg terminals, Google alerts, and conversations with banking partners can provide efficient flags as you monitor more factors over time, including bank stock prices and swap volatility, FX movements, and macro factors like federal reserve policy and inflation rates. This level of detail may seem tedious in the moment, yet could save your company's hard-earned war chest in times of financial distress with the opportunity to act quickly and decisively.

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9. Test the System and Watch Where Things Break

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• Intent: Whether you prefer to reference German field marshal Helmuth von Moltke ("No battle plan survives contact with the enemy") or Mike Tyson ("Everyone has a plan until they get punched in the mouth"), plan on regularly testing (and reaching the limits of) your system as you scale.
• Example: There is some healthy friction that should exist in moving money within your Treasury Operations. As an obvious example, not everyone in your company should be able to move all your company's money from all its accounts to anywhere in the world instantaneously. There should be some friction that codifies the business logic of your operations and implementation of any of the above principles. You will take a guess at what will work ex ante, and then something will go wrong. For example, the people you need to prepare or approve a wire might be on an airplane. Or a large invoice comes in from overseas that needs to be paid tomorrow, and your plan did not position enough funds in country (or in the appropriate currency). Or another one, you have the people who can prepare and approve all the wires you need to liquidate an account, yet the desired transfer amount exceeds your daily bank wire limit that can only be changed in Kafkaesque fashion...causing you to miss your wire deadline. The more your team practices and uses your system, the better you can fine tune the tension between velocity and controls to find what works for you, your stake holders, and your business.

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10. Regularly Check Your Premises and Iterate Toward Strength

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• Intent: Teams of high growth companies will always need to make tradeoffs and manage inherent tensions in a constructive way. Moreover, the right systems and workflows for one chapter of your business may not scale into the next chapter. Foster conversations regarding Treasury Operations in an open, constructive, and ego-free way to help stay ahead of risks before they arise, and catch small issues before they turn into big ones.
• Example: There is a constant balance in high growth companies between factors like friction and speed, risk and reward, controls and velocity, cost and benefit, and headcount additions and workflow triage. Treasury Operations is no different. Create the space to re-evaluate the way you do things on a regular basis. Is Treasury Operations part of your annual planning cycle? Did you just close a new round of funding? Did something not go as planned with your Treasury Operations? Did you just open a subsidiary in a new country? Is more than 10% of your cash collections coming from a different currency than you manage your business? Did you just turn cash flow positive? Has your topline doubled in the last few years (e.g. $100 Million to $200 Million, or $200 Million to $400 Million)? Do you have more finance team members? Are you launching a new product? Whatever the right check point is for your company, make sure to re-evaluate the ways in which you bring cash in, send cash out, and protect the cash you have in order to support the smooth operations of your business as you scale.

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The information provided herein is the opinion of Friends & Family Capital and does not reflect the view of any other person or entity. It is for informational purposes and should not be construed as an investment recommendation. Friends & Family Capital is an investment adviser registered with the U.S. Securities and Exchange Commission.